Consumers taking a big hit from credit card costs
By David Ranii
Credit card companies are imposing hidden charges and deceptive fees that are bleeding major dollars from consumers, according to a new report from the Durham-based Center for Responsible Lending.
One of the new industry practices alone is currently costing American families $720 million a year, a figure that could grow to $2.5 billion if more credit card issuers adopt the practice, calculates the report issued Thursday by the consumer advocacy group.
The new costs involve interest rates linked to the prime rate, late fees and international transaction fees, among others.
Overall, the industry has been altering at least eight practices to compensate for lost revenue stemming from new regulations adopted by the Federal Reserve and a reform law passed by Congress that is scheduled to take effect in February. The practices the study examines either aren’t banned by the new measures or it’s debatable whether they are prohibited, said the report’s author, Joshua Frank.
The report doesn’t include an overall price tag for the practices, but Frank estimated it exceeds $1 billion.
All the changes are “either hidden or obscure and complex enough that most consumers are unlikely to notice these strategies or to fully appreciate their cost implications,” the report declares.
Frank contends that the industry abuses are a strong argument for creating a Consumer Financial Protection Agency to monitor credit card companies “as they come up with new tricks.”
The center has had some success in the past persuading Congress to beef up protection for consumers with regard to mortgages and other issues.
Officials at the American Bankers Association, Visa and MasterCard either couldn’t be reached for comment or had no immediate comment.
Among the abuses cited by the report:
Pick-a-rate: Credit card companies that have pegged their interest rate to the prime rate usually have meant the prime rate on the last day of the billing cycle. But an increasing number of issuers have switched to picking the highest rates occurring within a 90-day period. The center examined prime rate data since 2000 and concluded that such a practice raises the annual percentage rate, or APR, by 0.3 percent.
With an estimated 117 million accounts affected, the impact adds up fast.
The center calculates that the total cost to consumers today is $720 million per year, and could reach $2.5 billion a year if pick-a-rate becomes the industry standard.
Manipulation of penalty fees: Five years ago, many of the largest credit care issuers imposed their highest penalty fee on late payments involving balances above $1,000. Today the threshold for the highest fee is typically $250. The result: 87 percent of consumers end up paying the highest fee, up from 53 percent several years ago.
International transaction fees. More credit card companies are adopting an international transaction fee for purchases involving a currency exchange, and the fee is rising. Most credit issuers who had such a fee charged 2 percent in 2004, but today the norm is 3percent.
Categories: Credit Tags: credit card fees
How to Avoid High Credit Card Fees
Individuals with problematic credit histories often suffer unfairly from high mortgage, insurance, and car loan rates. On top of that, they have difficulty getting approved for credit cards. The whole situation can get extremely frustrating. Frequently, I get emails from consumers wondering what they can do to rebuild their credit. The first thing I tell them is to get a credit card designed for people with bad credit. The second thing I tell them is written in bold: READ THE FINE PRINT.
There are only a limited number of credit cards for individuals with bad credit. At first glance, many look the same. They all help build and rebuild your credit by reporting to the major credit bureaus on a monthly basis. They all provide you with the Visa or Mastercard you need to make many purchases. And they are all necessary evils that can save you thousands of dollars in mortgage and car loan rates in the future. However, you must read the fine print before applying for one of these credit cards, as they often charge high yearly fees, set-up fees, and even monthly fees. Here, I will examine a few examples of charges current “bad credit” credit cards bury in the fine print. Of the three major cards I will examine, only one stands out as consumer-friendly.
“Bad Credit” Credit Card #1: This credit card charges a very low interest rate for an unsecured credit card. However, your first fine print glimpse reveals that there is a one time setup fee of $29. Not too bad. So far, since the next charge is a one time fee of $95. So far, we’re up to $124 in expenses. That’s got to be it, right? No. Add in another $48 for the annual fee and $6 per month in account maintenance fees. That’s brings the cost of your new credit card to $244 the first year, and $120 each additional year. This is no small change, and a card such as this should be considered only if you cannot be accepted for a better unsecured credit card for bad credit.
“Bad Credit” Credit Card #2: This credit card charges a very high interest rate for an unsecured credit card. This can’t be good. But the setup fee is only $29. Maybe this card isn’t so bad. There is that pesky monthly maintenance fee of $6.50 per month which brings the cost of this unsecured credit card to $107. Maybe we’ve found a bargain. Not quite. The annual fee is a whopping $150. Yes, $150 every year. That not only brings the initial cost up to $257, but you will also pay $228 a year just to maintain the credit card. There has to be a better offer.
“Bad Credit” Credit Card #3: This credit card is available as both a secured and unsecured credit card, based on the issuer’s review of your credit history. The interest rate is average, even competitive. Now, the fine print reveals that there is a one time setup fee. However, based on your credit, this fee can be as low as $0 or as high as $49. So far so good, especially if your credit is not that bad. But, there must be a huge annual fee. Not exactly. The annual fee for a secured credit card is only $35, and for an unsecured credit card, this fee can be as low as $39 or up to $79. So far, the cost of this card ranges from $35 to $128. Now its time for the monthly maintance fee. This one has to be huge. Or not. Its $0. That means the most you could possible be charged to obtain this credit card is $128, about half of what competing cards are charging.
Clearly, there are substantial difference between “bad credit” credit cards. Of the three offers we have examined, only one doesn’t take you to the cleaners. In fact, “bad credit” credit card #3 provides great value. All positive changes to your credit history and credit score will translate into lower loan rates, lower credit card interest rates, lower insurance rates, and ultimately, thousands of dollars in savings. The path to rebuilding credit has its costs, but in the long term, rebuilding your credit with a “bad credit” credit card is the fastest and most cost-efficient way to correct the often unfortunate circumstances that have damaged your credit in the first place.
©2006 Credit Card Depot Inc.
Categories: Credit Tags: bad credit card, bankruptcy credit cards, credit card fees, poor credit credit cards